ITAR? What’s An ITAR? Isn’t That a News Bureau in Russia or Something?

I have been in ‪#‎Iraq‬ helping to raise and train a Christian army to fight ‪#‎ISIS‬. Sons of Liberty International (SOLI), my new company that provides free military consulting and training to local forces fighting terrorists and oppressive regimes, has been consulting and training the Nineveh Plain Protection Units (NPU) in Iraq. In December I took a US Army veteran with me to Iraq to open a covert training facility north of Mosul, and SOLI began training Christian fighters.

Oh, surely, you say, if you’re a regular reader of this blog, he must have a State Department license before he provides defense services in Iraq, right? No one would just go on Facebook and announce to the entire world that he’s training soldiers in Iraq without getting a license first, would they?

VanDyke told Mother Jones that initially “nobody was sanctioning it.” He added, “Part of the whole purpose of SOLI is to step in where governments had failed, so going and asking permission from the governments that have already failed is not particularly productive.”

Uh oh.

Later, after telling Mother Jones “repeatedly” that no one in the State Department had the slightest idea he was training soldiers in Iraq, VanDyke seems to have changed his story. According to Mother Jones:

He subsequently stated in an email that “Sons of Liberty International complied with US registration requirements prior to signing a contract with the Nineveh Plain Protection Units (NPU), as required by U.S. law.”

Well, there you have it, yet another undocumented benefit of registration: once registered with DDTC, you can provide military training in the foreign country of your choosing. (DISCLAIMER: Professional scofflaw on closed course. Do not try this on your own. Serious legal injury, including criminal prosecution, could result.)

Law Firm Sues DDTC over Application of Brokering Rules to Legal Advice

On March 3, 2015, a small DC law firm filed a complaint against the Directorate of Defense Trade Controls (“DDTC”) seeking, inter alia, injunctive relief prohibiting DDTC from applying its brokering rules to the provision of specified types of legal advice. This blog previously has discussed the potential application of part 129 brokering rules to the activities of lawyers on behalf of their clients. As we stated, the broad language of part 129 always arguably covered legal work on behalf of clients, but no lawyers ever registered as brokers and DDTC never complained. When DDTC amended the brokering rules, it arguably then explicitly decided to start covering legal services. The interim rule does exempt legal advice, specifically noting, in the Federal Register notice at least, that legal advice about export compliance was within the exemption. The situation was then muddied when DDTC published FAQs on the brokering rules which said that common legal services, namely, “structuring a transaction” involving defense articles or negotiating contract terms involving defense articles was outside the scope of the exemption.

The plaintiff in the recently filed lawsuit optimistically (and some might say foolhardily) requested from DDTC an advisory opinion stating that certain legal services, such as advising on the structure of transactions involving defense articles and drafting contracts for the sale of defense articles, were outside the scope of Part 129. Not surprisingly, the request for an advisory opinion languished at DDTC for months, despite the plaintiff’s repeated communications with DDTC asking them to act on the advisory opinion request. Finally, according to the complaint, and eleven months after the request was made, a DDTC official called plaintiff and said the rules did not cover the activities specified in the request, and plaintiff, based on those representations, agreed to withdraw the request.

Seven months later, on February 24, 2015, in a plot twist worthy of Franz Kafka, the same DDTC official sent a letter to plaintiff and, incredibly, retracted the previously provided advice:

Please be advised that your letter of August 29, 2013 and our conversation which took place on July 3, 2014, lacked sufficient detail for the Department to make an official determination as to whether the activities discussed constituted brokering activities.

The official asked the plaintiff to submit another advisory opinion request. The understandably frustrated plaintiff filed a lawsuit instead.

There are, of course, a number of problems with applying Part 129 to legal services beyond the provision of legal advice on export compliance. To begin with, lawyers will need prior permission from the State Department under section 129.4 before becoming involved in transactions involving specified defense articles such as night vision equipment. Worse, section 122.5 would require lawyers to make all records relating to these transactions available to DDTC and law enforcement in violation of attorney-client privilege.

The good news, of course, is that DDTC’s bizarre volte-face on the applicability of Part 129 to legal services is unlikely to be favorably viewed by the court and means, I think, that the initial advantage in this lawsuit is with the plaintiff.

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Sep

11

First Thing We Do, Let’s Register All the Lawyers

One of the issues that has haunted the efforts by the Directorate of Defense Trade Controls (“DDTC”) to amend its brokering rules has been what to do with lawyers. Are lawyers that assist their clients with transactions involving defense articles brokers or not? Do they need to pony up registration fees? Worse, are there situations where they must get permission from DDTC before counseling clients on defense related transactions?

To be fair about the issue, DDTC is trying to fix an issue that arises from the overly broad definition of brokering services in the current rules. The current definition covers anyone who acts “as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee.” The minute a lawyer calls the lawyers for the other side, the issue arises as to whether the lawyer has become a broker. It’s easy to say that the lawyer isn’t in that case an “agent” for his client in the traditional sense, except for the fact that DDTC has made clear that “agent” here is meant in a very broad sense that goes beyond the notion of an agent under the common law of agency. No lawyers have been registering as brokers, and DDTC has so far never suggested that it had any interest in pursuing lawyers.

The newly released “interim final” rule attempts to address this issue, and by explicitly raising the issue may make the situation even worse than it was when the rules were silent on the issue. The “interim final” rule says that brokering activities do not include “activities by an attorney that do not extend beyond the provision of legal advice to clients.” Not surprisingly, there is no definition of “legal advice” but DDTC tries to clarify it with this comment at the beginning of the Federal Register notice on the “interim final” rule:

The Department has clarified that “activities by an attorney that do not extend beyond the provision of legal advice to clients” is not within the definition, and notes that “legal advice” includes the provision of export compliance advice by an attorney to a client.

Two problems now are posed by the “interim final” rule. First, the exemption applies only to the extent that a lawyer is communicating with his own client. If he or she talks to the other lawyers in a transaction, the lawyer has arguably become a broker. Second, lawyers in a transaction involving defense articles are going to provide legal advice far beyond the “provision of export compliance advice.” Simple advice to the client about whether the contract should include an arbitration clause, or whether the law of New York or California applies. Those might be clear examples of legal advice but what if the lawyer provides his or her thoughts on certain risks that the transaction might pose? Is that business or legal advice? Has the lawyer stepped over the line and become a broker?

And here’s the most terrifying thought. If the transaction involves a “foreign defense article,” then under the “interim final” rule, a lawyer will need State Department approval before advising his or her client on whether to include an arbitration clause or before the lawyer calls opposing counsel to discuss contractual issues. I suspect that many lawyers will ignore these requirements but that is going to be harder to do under the new language in this rule when (and if) it goes into effect on October 25 of this year.

Miracle on E Street

It seems like the Directorate of Defense Trade Controls (“DDTC”) has been working on the amendments to the brokering rules in Part 129 of the International Traffic in Arms Regulations since sometime during the Taft Administration. So when the latest iteration of these rules, oxymoronically labelled as the “Final Interim” Rule, appeared early this week I wearily clicked through to the Federal Register notice, fully prepared to revisit the horror that I had experienced some many times before. But, but, I soon realized that the lengthy gestation of the rules and the numerous rounds of public comment had borne fruit. Although not perfect, this new version fixes a number of the problems that plagued the previous versions.

I will over the next several days review various parts of the new rules, but I want to start with the best news. Cue music for a happy dance: DDTC has finally gotten the jurisdictional scope of the rules right. As many of you know far too painfully, DDTC had, starting with some improvident remarks made by at least one former staffer at the agency, argued that the brokering rules, even before any proposed amendment, covered foreign persons in foreign lands if a U.S. origin defense article was involved. The earlier versions of the proposed rules made this explicit, covering U.S. persons, all persons in the United States and

any foreign person located outside the United States involving a U.S.-origin defense article or defense service.

The Final Interim rule completely eliminates this last category and, at last, returns to the original intent of the Brokering Amendment to the Arms Export Control Act, the authority for the brokering rules in the first place. As DDTC says in its comments on the Final Interim rule:

In conformance with the statutory requirements for the brokering of defense articles and services, the Department has revised the proposed changes to these definitions to clarify their scope. In particular, the Department has clarified that foreign persons that are required to register as brokers are those that are in the United States and those foreign persons outside the United States that are owned/controlled by a U.S. person. And the Department has removed from the definition of ‘‘brokering activities’’ the activities of any foreign person located outside the United States acting on behalf of a U.S. person.

This is great news and eliminates an enormous headache for exporters that use foreign reps and agents to distribute their defense articles abroad.

The only downside is that this new language makes clear the foreign subsidiaries may have to register, something that had not been required by previous versions of the rule which covered activities “for others” and which some at DDTC had said informally did not cover companies under the same “corporate umbrella,” although some others at the agency have said informally that all foreign subsidiaries were covered if they were involved in the parent company’s sale of defense articles.

We’re Not Done Yet

Another problem with the arms brokering regulations proposed by the Directorate of Defense Trade Controls (“DDTC”) is their jurisdictional scope, which is impossibly vague and far exceeds the scope of permissible regulation under the Brokering Amendment which was passed by Congress and which permitted DDTC regulation of arms brokers in the first place.

So let’s start with vague. Under the current rules, the rules’ requirements of registration and approval apply to foreign brokers “subject to U.S. jurisdiction.” Normally this would mean foreign persons with sufficient contacts with the U.S. so as to permit jurisdiction over them consistent with the due process clause. DDTC has been arguing that this should also include any foreign person who has any contact with U.S.-origin defense articles. The new rules would codify this remarkable and extraordinary claim for the permissible scope of U.S. jurisdiction. stating that its requirements cover activities of:

any foreign person located outside the United States involving a U.S.-origin defense article or defense service.

Notwithstanding the numerous ways that U.S.-origin can be defined the proposed rules are completely silent on what constitutes a U.S.-origin defense article. Is a tank with one lugnut made in Grand Rapids a U.S.-origin article. Or is there a requirement that U.S. parts constitute at least 50 percent of the value of the item? Or does it require that a substantial transformation or tariff classification shift occur in the United States. The new rules provide absolutely no guidance, largely because, I suppose, DDTC sees the United States as having unlimited jurisdiction over foreign persons, and therefore, the agency intentionally wishes to keep this concept vague.

Whether or not the U.S. has such broad jurisdiction, it is quite clear that when Congress passed the Brokering Amendment which authorized these rules in the first place, it didn’t intend to confer such broad jurisdiction. As I detailed in this article (subscription required) back in 2006 in Export Practitioner, the House Report on the Brokering Amendment makes it crystal clear that Congress only intended to cover “U.S. persons (and foreign persons located in the U.S.).” It does not authorize DDTC to try to exert jurisdiction over foreign persons outside the United States that may have some connection to a defense article that has one U.S. part in it.